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Sunday, October 23, 2011

SPX and Dow Update: Stocks at a Critical Inflection Point

Here's what I know for certain: there's a big move coming.

With the new high on Friday, stocks have reached a critical inflection point which could drastically change the expectations and projections going forward. Since the rally began, I have been anticipating a moderate-to-deep B-wave retracement. If we don't reverse before reaching the price levels outlined below, that prior expectation will be nullified.

In Elliott Wave, you must evolve your counts as the market dictates. Just as in life, you must actively change with the changes, or be left behind. Some Elliotticians find a count and stick to it, no matter what the market is telling them... in fact, this is a much easier approach for the technician as he can chart much more quickly each day. If this is the approach you are looking for, then my updates are probably not a good fit for you.

My approach is to continually challenge my assumptions each and every day, as new price information becomes available. I then report my findings here. I will strive to communicate when my previous interpretation was wrong, and when the assumptions have changed.

The short-term wave structure presented to us by the S&P 500 (SPX) and other indices has been a challenge to decipher. My best guess, which I presented in the last two updates, was that we had completed wave 4 as a sideways correction and were due one more lunge to new highs, which would then whipsaw. I am still favoring this interpretation. However, time and price are running out for the market to honor this.

The good news is, the drop-dead level for this count is not too far away. I have charted many different indices this weekend in the search for greater clarity. After studying countless charts, I believe the Dow may hold the key to deciphering this move. See chart below:

The best thing about the Dow is that it's very close to the knockout level for this count. Due to the length of the third wave, and the rule under Elliott Theory that the third wave cannot be the shortest wave, the knockout level for this count is 11,993 (11,992.37 to be precise). Thus, we should have a definitive answer on this count in short order.

The Dow has completed five clear waves to the upside, so the move up could end at any time... but, based on the one-minute charts, I am anticipating a little more upside to complete the move. Futures are down slighly as I write this, so it remains to be seen. We know which levels to watch on the upside; here are some concrete things to watch for on the downside: a move below the bottom line of the red trendchannel would be the solid warning of a trend change, and a move below the blue Wave 1 high would be complete confirmation.

The updated SPX chart is shown below. The labeling on this chart is slightly different than the Dow, and shows a potential ending diagonal, which I first proposed on Wednesday. The ending diagonal may or may not hold true. If we were to label this chart in a similar fashion to the Dow (see gray "alt: 4" annotation), then the ending diagonal becomes unnecessary.

So that's my preferred interpretation. I am still expecting a whipsaw here, but the charts are far from definitive -- which is pretty much always the case at tops and bottoms. However, in the event that I'm wrong, I feel it's important to show an alternate, more bullish interpretation.

The more bullish interpretation would be that we already completed the B-wave. This is certainly technically possible, but the structure just doesn't look right to me, based on the smallest waveforms... however, the possibility can't be confirmed or ruled out yet. The chart below is the bullish alternate labeling for the SPX:

It's probably safe to say that, at this point, most traders believe this rally is going to continue. And it well may. But at this moment, based on my best interpretation of the wave structure, I continue to be of the opinion that this is a fake-out.

As I said earlier, though, the good news is the answer isn't far away. If we trade above 11,992.37 on the Dow, then my prediction of a whipsaw will be off the table, and I will have to give weight to the more bullish alternate count.

The charts are telling us there's a big move coming. Since we know the levels to watch, the next few sessions should hold the answer as to which direction that move will be.

(**Please note there was a typo in Friday's article regarding the Russell 2000 (RUT): the text states that 731 should contain any rallies in the RUT based on the count shown on the chart; it should read 739.)

102 comments:

Futures are up, the indexes feel like they just want to keep going higher... Also the Euro is on its way to test the 1.40 level, which should be critical resistance for the Euro... We should find out very soon whether your preferred count is correct or are we onto the alternate wave C count

Since the indexes are pretty much led by the movement of the Euro during the trading session (does anyone notice how long this phenomenon has been like this?) Can you do an Elliot wave analysis on the euro?

Ugh, Forex. :) Stockcharts gives terrible data on forex, which means I have to screen-shot my account charts and annotate in Photoshop.

Beyond that, I'd be starting from scratch, since I've never done a LT Euro chart. It would literally take me several days, and it's hard to find the extra time. Might be a project to work on bit by bit, though.

Just went and glanced at it. FWIW, Euro looks due a pull-back to between 1.371-1.382 over the short term.

Traditional TA would have a false break of the rectangle to the down side (1075) and revert quickly back inside the box and break the opposite side of the rectangle (up) (happening now) with a target around 1350 area. That jive well with your alternate count. Just don't look at the fundamentals, that's a joke.

I may be a bit premature by I would say the ED count is dead at this point. Although (as we discussed last week) my preferred count right now is that last week was wave 4 of wave C that began at the 10/4 low (with a failed 5th), the end result would be pretty much the same as your count that last week was the low of wave B. Both counts would suggest a test of the falling 200 day SMA around 1275 is likely, although my count would say that is about the max upside limit and your count would allow for much higher targets.

From cycle standpoint alot of similarities to 2007 this year especially for NDX. Both years had a sharp decline after February expiration and an important low around mid-March. Both had a rally into mid-July and then a very sharp decline into mid August. And then in 2007 the NDX rallied into it's bull market top in the final trading day of October and then retested that top in the first couple of trading days of November and that was all she wrote. Will history repeat or at least rhyme this year? My cycle work is suggesting it will.

SPX should be finishing this wave right about now @ 1249. I'm expecting it to start correcting here... now we see if the wave it's finishing is wave 5 of A (or C) or wave 1 of C. I believe your count would be 1 of 5 of C.

In the next 2 weeks I have a couple of turn dates which don't specify polarity, they are 10/27 +/- 1 and 11/4 +/- 1... I have been expecting 10/27 +/- 1 to be a high, but if we were to get a blow-off type short covering panic today then I could see that followed by a pullback into 10/27 +/- 1 and then a final rally into 11/4 +/- 1. In fact I am starting to favor that interpretation especially if NDX can break last week's high today.

Yeah, this move off 1074 has been something. I remarked a while back that it reminded me a lot of March '09. I spotted something in the charts this weekend that I'm actually very hesitant to post, but it could blow the whole bear case out of the water. I haven't posted it because I simply have too hard a time suspending disbelief.

Sharp eye Pretzel ;-) ... I have been watching the analog to the rally off the March 2009 low somewhat it disbelief as well but cognizant of the fact that we have been tracking almost exactly thus far.

There all plenty of bullish counts out there but nobody including myself can bring themselves to believe them given the fundamental backdrop. If I was from the planet Mars and just landed here without any knowledge of the economic fundamentals or news I and just looked at the charts I would probably be long-term bullish :o

I guess I should clarify. There are plenty of ways to count the market as bullish, but I have not seen anyone consider them yet. The count you showed I have not seen anywhere on the internet, but I had considered it myself. I've had super bull counts waiting in the wings for a while now, but I just can't swallow them at this point, not with this gigantic debt overhang. We would need a Jubilee type event (debt forgiveness on a massive scale) in order to have the fundamental backdrop support the super bull counts.

CTP- yeah, with the fundamental backdrop, it's hard to imagine a massive third wave coming in here... 'course it was hard to imagine the B wave coming in when it did, given the fundamentals. That one, I was largely expecting though, 'cause it was in the charts. One could argue that maybe the third wave is in the charts too...

This rally, you'd have done better just sticking with support/resistance. The Rally from Hell... as I said, reminds me of March '09. Bears kept shorting, waiting for pullbacks that never really materialized.

Definitely has the feel of a wave 3 of something today IMHO. Per my preferred count this is 3 of 5 of C off the 10/4 low. Ideal scenario is short covering panic into close today to finish off wave 3, then chop sideways to down into 10/27 +/- 1 for 4 of 5 of C. Then final 5 of 5 of C thrust into 11/4 +/- 1 and the bear resumes with a vengeance. Come on Mr. Market follow my script ;-P

Yes we are in the same camp. But they are going to make it very convincing before it finally rolls over. Need to have mass capitulation of bears first, so it is going to get real painful for the shorts near term IMHO...

There is one part about the market I don't quite understand: If the majority needs to be wrong and fooled by the market before the market reveals its true move, which makes sense, but doesn't the big money move the market? Doen't the majority have the most money? Or is it really like the wealth gap in general - where the minority has the most money in the market as well?

RSI hinting all we saw so far was 1-2, 1-2 and this is 3. I think my labeling of 4 on the Dow chart is correct, CTP. If this is wave 5 of your C count, I think it started on the 20th... otherwise, it's gonna likely be too big.

Tactically speaking I would imagine we are going to get to EU officials playing down prospects for Wednesday in order to simmer down the expectations, so I would not be surprised to see the market pullback and trade nervously into Wednesday after today's squeeze has run it's course. Then the focus should shift the the 11/2 Fed meeting and 11/3-4 G-20 meetings. That is the window where I would expect a major turn coincident with my 11/4 +/- 1 cycle turn date.

I'm back... We're fading a bit into the close and we came within 4 points of my 1261 target at the intraday high so that might have been it for wave 3 of 5 of C. Still could get a gap up tomorrow morning to finish it off but that would be a huge gift for shorting IMO... From here I would expect a pullback to hold either above 1233 or 1240 depending on whether the wave 4 low was on 10/18 or 10/20 (and I can come up with valid counts for either one). Basically 1233 has to hold for my preferred count to remain valid and to set up a further runup to 1275 SPX. Otherwise today was THE top of the rally from 10/4 which Pretzel counts as wave A but I am counting as wave C... Hope that wasn't to confusing. :)

It sounds you both are certain a big move is coming for the markets. Direction is still unclear, but we should know more very shortly. Is it possible to have another big move up after a 17% move in 15 trading days? If the big move is going to be to the upside, what sort of time frame are we referring to (weeks, months, year, etc...)?

Rocky- 739 would be IF the alternate count has the correct placement for 1 and 3. The rally is far from crystal clear as to labeling, though, so there's definitely room for interpretation. I'm really looking forward to some nice impulse waves to the downside again... the wave structure is always much cleaner when they're moving in line with the larger trend. Counter-trend is always trickier; as are the major turning points at trend changes, imo.

I don't see a big move to the upside from here. I expect we are going to be topping over the next week and the next big move will be to the downside. Now that interpretation may change depending on the character of the next intermediate-term pullback but for now my expectation is ST pullback over next couple days, then one last ST pop to 1275 SPX before the bear resumes.

CTP - at this point, if this is A, it would likely have to be part of a massive flat. Anything else, and the NDX blows up the counts.

It certainly feels like a C wave of some form; this sure seems like 3rd wave energy. Most likely, it's either C of Minor (2) of the A-B-C alternate count going back into August (shown in black on the above charts), or it's C of the count shown in the last chart in this article... but again, I have a hard time seeing how that count won't blow up the NDX.

That whole consolidation mess leading out of August is what makes this a challenge right now. There's no clear-cut form there, which leaves enough question marks to make this rally challenging to position.

Even looking at 2007/early '08 analogs isn't much help. The wave structure preceeding that rally was cleaner, and this rally has been much more unrelenting than that one was.

Yes I am strongly in the camp that this is the C wave of a Minor 2 flat starting at the August low. Main reasons for that are that it is the only count that can be reconciled with NDX and it also fits with my cycle work.

As far as a move the 1275 turning up my longer-term cycles, the answer to that is a bit complicated. Basically I have taken the Hurst methodology and have backtested various mechanical system based off of it. In doing that I only found 2 sub-cycles that could be used to form profitable trading system. The long-term cycles you refer were not consistent enough and to open to interpretation to be useful from my studies. So, in essence that way I use Hurst methods is unique and thus I would not expect to find anyone out there who would interpret the cycles the same way that I do. That said, a move to 1275 SPX would not turn my cycle work bullish.

Just looking at the NDX chart now. On the 60 minute, you can see a very clear 1-2-3-4, and on the 5-minute, can see 1-2-3, with 4 likely in process. 5 is gonna practically bump its head on the prior high, which would be about perfect.

His count of the correction is very similar to the one I posted in the Weekend Discussion charts. But I'm glad you shared it anyway, because he caught a potential ST triangle in the Dow that has caused me to update the max price to 12,093.50.

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